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TMI Blog2002 (11) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of income under Rule 8 of the I.T. Rules, 1962. After determination of the agricultural income, any deductions permissible under the Agricultural Income-tax Act are further to be allowed. That this principle was reiterated by the Calcutta High Court in the case of Warren Tea Ltd. v. Union of India [1999] 236 ITR 492. That cess is a duty or levy which is imposed under the special provision of the Cess Act. In this case the cess has been levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973. That the payment of cess is incidental and ancillary to the carrying on of the business (of tea grown and manufactured) by the assessee. That Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 held that the expression "for the purpose of the business" in section 10(2)(xv) [corresponding to section 37 of the I.T. Act, 1961] is wider in scope than the expression "for the purpose of earning profit". The payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business is thus allowable deduction. That the payment of cess does not create any asset or advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance 60% of the income would be agricultural income for purposes of the State laws. That the cess which is relatable to the growing of tea in the tea gardens is allowable as a deduction as all other expenses, such as wages paid to the workers for plucking tea leaves or cultivating the fields or the depreciation on the agricultural implements used in the cultivation of tea and various other expenses which are basically connected with the cultivation of tea are to be allowed as deduction in computing the entire income derived from growing and manufacturing of tea. That the decision Dt the Gauhati High Court in the case of Jorehaut Group Ltd., referred to by the CIT in his order under section 263 has been invoked without considering the context in which the said decision was rendered. It has been claimed that the decision of the Gauhati High Court is with reference to section 8(2)(e) of the Assam Agricultural Income-tax Act by virtue of which cess paid is allowed as a deduction in computing the agricultural income. Attention has been invited to the section 8(2)(e) of the Assam Agricultural Income-tax Act which provides for deduction of any tax or rate paid under any enactment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution of India empowers the State Legislature to levy tax on agricultural income. Entry 46 of List II of the 7th Schedule to the Constitution of India relates to tax on agricultural income. Article 366(1) provides that the expression 'agricultural income' in the Constitution of India means agricultural income as defined for the purpose of the enactments relating to the Income-tax Act. It is thus clear that the power of the State Legislature for enacting laws under Entry 46, List II would extend to the agricultural income as defined in the Income-tax Act and laws relevant to the said Act. 8. Section 2(1A) of the I.T. Act, 1961 defines agricultural income as under:-- '(1A) "agricultural income" means (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) any income derived from such land by- (i) agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-ill-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of rubber and income from manufacture of coffee respectively with which we are not concerned. However, Rule 8 is specifically applicable with reference to income derived from sale of tea grown and manufactured, which reads as under:-- "8--Income from the manufacture of tea.--(1) Income derived from the sale of tea grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. (2) In computing such income an allowance shall be made in respect of the cost of planting bushes in replacement of bushes that have died or become permanently useless in an area already planted, if such area has not previously been abandoned and for the purpose of determining such cost, no deduction shall be made in respect of the amount of any subsidy which, under the provisions of clause (30) of section 10, is not includible in the total income." 11. It is observed from Rule 8 reproduced above that the income from tea grown and manufactured by the seller is to be computed as if it were income derived from business. Thus, the fiction is created under Rule 8 for treating the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of tea grown and manufactured by the sellers in India. It was further observed that 40% of such income would be deemed to be the income liable to income-tax under the Central Act and the balance 60% would be the agricultural income under the State Laws. 13. Thus, it is evident that for purpose of assessment of non-agricultural income under the Income-tax Act, 1961 as also for purposes of assessment of agricultural income under the State Agricultural Act, first it is necessary to determine the entire income of the assessee derived from growing, manufacturing and sale of tea. As per Rule 8, 40% of such income is deemed to be the income liable to income-tax under the IT. Act, 1961 and the balance 60% of the income to be agricultural income for the purpose of levying agricultural income-tax under the State laws. The scheme of taxation under the Income-tax Act requires determination of the income in accordance with the provisions of the Act. It would thus be necessary to refer to other provisions of the I.T. Act, 1961 relevant for determination of income from business. The Act recognizes the distinction between the gross total income and the net income. "Gross total income" is def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.' Thus the question arises as to whether the cess levied under the West Bengal Rural Employment Production Act, 1976 and the West Bengal Primary Education Act, 1973 can be said to be an expenditure laid out and expended wholly and exclusively for the purposes of business or profession. 16. In the case of Mahalakshmi Sugar Mills Co., the issue came up for consideration of the Supreme Court as to whether the interest paid by the assessee engaged in the business of manufacture or sale of sugarcane for the delayed payment of the cess is allowable as a deduction. It was held that cess is nothing but additional cess and is to be allowed as a permissible deduction in computing the business income. It becomes abundantly clear fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or vocation carried on by him. Sub-section (2) says that such profits or gains shall be computed after making the allowances set out therein. Clauses (ix) and (xv) of this sub-section are as follows: "(ix) any sums paid on account of land revenue, local rates or municipal taxes in respect of such part of the premises as is used for the purposes of the business, profession or vocation. (xv) any expenditure [not being an allowance of the nature described in any of the clauses (I) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee] laid out or expended wholly and exclusively for the purposes of such business, profession or vocation." Sub-section (4) of section 10, the extent it is material, is in the following terms:-- "(4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate of tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains....." 19. A provision analogous to section 10(4) of the 1922 Act was proposed to be incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, a deduction otherwise allowable under this Act in respect of-- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) to (f) shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:" Since under section 43B the payment of cess is also provided to be allowed as a deduction in the year of payment, by implication it becomes abundantly clear that cess is permissible as a deduction in computing the profits and gains of business of which deduction is regulated under section 43B. 22. In the case of Warren Tea Ltd., Their Lordships of the Calcutta High Court held the stage for grant of deduction under section 80HHC of the Income-tax Act, 1961 required to be given in the assessment of computation of income of an assessee growing, manufacturing and selling tea and also exporting tea out of India would be at the time before computing the net inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y would not be entitled to get the tax clearance certificate as the deduction of cess from 60% of the composite income had not been approved. A petition under Article 226 of the Constitution of India was filed by the Jorehaut Group Ltd. in the Gauhati High Court raising a question as to whether cess to be paid by the assessee under the Assam Taxation (on Specified Land) Act, 1990 is allowable as a deduction from 60 per cent of the composite income of tea. 25. Their Lordships of the Gauhati High Court decided the issue in favour of the assessee. Their Lordships referred to section 8(2)(e) of Assam Agricultural Income-tax Act and held that deduction was permissible. It would be relevant to reproduce Rule 8(2)(e) of the said Act. It reads as under:-- "Rules prescribing the manner of determining the net amount of agricultural income for the purpose of this clause shall provide that the following deductions shall be made from the gross amount of such income, namely,..... (e) any tax or rate paid under any enactment in force in Assam on the cultivation or sale of the crop from which such agricultural income is derived." 26. It is evident from the decision of the Gauhati High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imary Education Act, 1973 is not allowable as a deduction in computing the composite income under Rule 8 of the I.T. Rules, 1962. On the contrary, the decision of the Calcutta High Court in the case of Warren Tea Ltd. is an authority for the proposition that any deduction which is permissible as deduction in computing the income from business is to be allowed as deduction in determining the composite income before apportionment. 29. If we peep deep into the decision of the Gauhati High Court, it would appear that cess under the Assam Taxation (on Specified Land) Act, 1990 being a tax on specified land, may not be allowable as a deduction in computing the composite income. It may be necessary to clarify that all the taxes or cess may not qualify for deduction in computing the income from business. The claim shall have to be decided in the light of the basis of taxation. For example, the income-tax which is a tax on income is not allowable as a deduction out of the composite income before apportionment, because the income-tax is not a tax incidental and ancillary to the carrying on of the business (of tea grown, manufactured and sold by the assessee). Wealth-tax is also not allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market value as so determined shall be taken to be the market value for the purposes of this sub-section; (b) where there is a common charge on both agricultural income assessable under this Act and income chargeable under [the enactments relating to Indian Income-tax] and such charge is an allowance permissible both under those enactments, then, if for the purposes of [the enactments relating to Indian Income-tax] the part of such charge which is to be deemed to be the allowance permissible under those enactments has been determined under those enactments the remaining part of such charge shall be deemed to be the allowance to which agricultural income assessable under this Act is subject," 30. It may also be relevant to refer to the provisions of Assam Agricultural Income-tax Act. Section 8 relates to determination of agricultural income. It provides the procedure for assessment of agricultural income and also provides for certain deductions including taxes etc. out of the agricultural income. There is a proviso to section 8 which reads as under: "Provided always that no deduction shall be made under this clause, if it has already been made under section 7 of this Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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